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Don’t flatter your figures based on property bounce, Irish banks told

A senior regulator as warned banks not to flatter their accounts prematurely with so called “write backs” based only on rising property prices.

The level of activity in the housing market is too low to have high levels of confidence in prices, the Central Bank’s director of credit institutions supervision has said.

“The ability to write back provisions must be reflective of a conservative view and therefore the timing and extent to any write-backs must be balanced extremely carefully,” Sharon Donnery said.

Demands to bolster profits, reserves and capital, including from regulators, can’t be allowed to destabilise progress on debt resolution, she said. Provisions are amounts set aside by banks based on expected losses.

Ms Donnery said it would be a “significant backwards and destabilising step” if a bank had to reverse course and re-recognise provisions in the coming years.

“Banks in Ireland are now painfully aware that the recognition of appropriate levels of provisions is critical to stabilising and working out a non-performing loan portfolio.

“We will continue to strongly challenge our banks to make sure the appropriate balance is struck,” she added.

Ms Donnery’s comments came at the Banking & Payments Federation Ireland’s national conference in Dublin.

Speaking after the event, AIB chief executive David Duffy said he thought Ms Donnery’s remarks were “absolutely right”.

AIB wrote back its provisions in the third quarter of the year, and in recent weeks there has been speculation that other banks will follow suit as property prices rise.

But Mr Duffy was not concerned about provisions at his bank. “I think you’ll see when we get into detail, which I haven’t got yet, that the great majority of our provision releases are individual restructurings where value has been recovered that is in excess of what we had provisioned for,” he said.

“The model-type provisions (which rely on forward-looking assumptions)…is de minimis, with the adjustments we’ve made it’s de minimis. It’s real restructuring, it’s real value.”

Mr Duffy said the bank is not overly focused on changes to its peak-to-trough assumptions – the extent to which it expects house prices to fall.

“I think we’re really at 52pc peak to trough versus 40ish now which is the CSO, so maybe [we’ll change it by] a point or two…we’ll remain extremely conservative.”

Mr Duffy said the bank has had no discussions yet on repayment of the €21bn in capital it got from the State. “We decided to wait in substance until after the stress tests,” he said.

He said it will discuss a possible timetable for repayment in a meeting with government officials before Christmas. The Bank will repay the full amount of capital it received, he said.

Article Source: http://tinyurl.com/kbwqb42

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